Kevin Armstrong’s Strategy Thoughts
April 2013
How attitudes have changed since 2009!
Introduction
Very little has changed over the last four weeks. Markets have not rolled over, as I have feared they
would for many months now, but this does not reduce my level of anxiety, rather it heightens it. Now
is not the time for comfortable complacency about the prospect for ever better returns, but that is what
we are seeing to an ever increasing degree with each day that passes. It is vital that all investors
recognise just how far attitudes and expectations have changed over the last four years.
This month’s Strategy Thoughts may turn out a little different than normal (if there indeed is a
‘normal’ for Strategy Thoughts), partly because of the need to explore the degree to which attitudes
have developed but also due to my imminent departure to the US for the month of April to promote
‘Bulls, Birdies, Bogeys and Bears’. I have also spent ample time over the last two months outlining
both my longer term (secular) views, which by their nature should change only rarely, and also my
shorter term view that the cyclical bull market that began four years ago for most markets is either
already over or in its final stages. This remains firmly intact so it is therefore unnecessary to revisit
those previous rationalisations.
In addition to reviewing the attitudinal shift among investors that is so important I will also comment,
possibly slightly tongue in cheek, on the latest headlines created by the former ‘Maestro’ Alan
Greenspan and also the headline grabbing story from Australia about the plans for ‘Australia 108’ the
proposed tallest building in the southern hemisphere.
Attitudes and complacency
I do spend a lot of time watching the financial media, particularly CNBC, and reading the financial
and investment press. This probably does not surprise readers, but I have been particularly struck over
the last few weeks, as the ‘countdown’ to new highs took place in America and each subsequent new
high was celebrated with almost breathlessly excitement, with the degree to which the ‘bulls’ have
grown in confidence. This is understandable, they have been correct, however, it can become
dangerous when ones confidence grows too fast and goes too far.
On a smaller scale (although not that small) this behaviour and danger was seen last year in Apple.
Then bullish analysts were seemingly battling to leap frog each other to be the most bullish and I
suppose feel the most right. With hindsight we can now see that the crescendo of the fervour, and
targets in the thousand plus dollar area, occurred immediately prior to the stocks 40% collapse in less
than six months.
Recently I have been amazed how commentator after commentator has been wheeled out to proclaim
that a new secular bull market has just begun. This confuses me, firstly because surely that new bull
market, of whatever degree, must have begun more than four years ago and at levels 50% or more
lower. Secondly, I wondered what these fervent long term bulls were saying back in March 2009
when it would have been particularly useful to have called a new long term bull market, even if it only
turned out to last four years.
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I started to note down the names of each rampant bull and then began Googling their comments from
early 2009. You probably won’t be surprised with what I found!
Before going through some of those individuals’ transformations, from scared to super bullish, I
thought it only reasonable that I look back at what I was writing in early 2009.
March 2009 revisited
In early March of 2009 I titled that month’s Strategy Conclusions “A reversal in everything (again),
the bottom of the ‘slope of hope’” and raised the strong possibility that, given the extreme gloom
that was by then dominating all forms of media, an important turning point may well have been seen.
Later that month, on the 24th March, I wrote the April edition of Strategy Thoughts and titled it;
Has a cyclical low been seen?
I concluded that month’s Strategy Thoughts with the following;
Strategy Conclusions last month concluded with the belief that the bottom of ‘the slope of hope’ was
close at hand and may even have been seen and that as a result we were now as optimistic about
equity markets globally as we had been for at least four years. We stated that this was not a trading
move but equally this was not the start of a once in a generation or more buying opportunity at the
end of a secular bear market and so the beginning of a secular bull market. This continues to be my
view for a whole host of reasons, some of which hopefully I have illustrated in this month’s Strategy
Thoughts, and it will continue to be my view even if, as expected, the so called fundamentals continue
to deteriorate. In fact if the markets can hold their own, or continue to advance, in the face of
seemingly poor news it would only serve to increase my confidence in the prospects for a meaningful
cyclical bull market.
I believed that a new bull market was beginning, but that it was only a cyclical bull market,
comparable to that enjoyed from 2003 to 2007 not to the secular bull market from 1982 to 2000.
Nonetheless, I anticipated that it would be a rewarding bull market and that one should be invested to
take part in what would be another climb up a ‘wall of worry’.
Within that edition I also raised the question of how a new cyclical bull market, if that was what had
indeed begun, might end. I wrote;
This question is obviously incredibly premature given that the current rally is not even the largest of
those seen during the bear market to date. Nonetheless, it is still worth thinking about as it helps to
crystallise the distinction between the longer term, secular, positioning of world markets and the
intermediate, cyclical, position.
If a cyclical bull market has indeed begun then it is starting amid a bleak global economic
environment, as described above, just as all bull markets of any degree tend to and the love of risk
two years ago has been transformed into an outright fear. The issues that are creating that sense of
fear and foreboding all relate to the longer term, secular, unwinding that is still required both
economically in the form of global deleveraging and within equity markets by them becoming
historically very cheap (not just a little below fair value). This will all take time and is unlikely to
occur in a neat orderly fashion with the ultimate destination, in both time and price, being clear to
everyone. Rather the path to a secular bottom is made up of a series of cyclical bull and bear markets.
So far during this still relatively young global secular bear market we have suffered two cyclical bear
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markets and one cyclical bull market. It is likely that we will enjoy and suffer at least one more
cyclical bull and bear phase before it ends.
As every cyclical bull market in a longer term secular bear market progresses eventually the belief
grows that the worst has been seen and the recession / bear market are over and it’s off to the races
again. One only has to think about the psychological progression that markets went through from
disbelieve in a ‘jobless’ global recovery in 2003 and deep scepticism about any recovery in
investment markets to the broad belief two years ago that the ‘ocean of liquidity’ would ensure that
all markets for everything would continue to rise. Obviously we now know it didn’t.
Without intending to be disrespectful to the IMF, it is likely that any new cyclical bull market will end
amid similar beliefs to those witnessed at the end of the last cyclical bull market two years ago. With
equity markets substantially higher and the fear of risk once again having, at least partially,
evaporated it is probable that forecasts for economic growth will be being revised higher and a
general belief that the ‘Great Depression II’ has passed and been survived. Credit will undoubtedly
be given to the various central bank and treasury officials globally who will appear to have
engineered the recovery and all the long term concerns and fears that are so near the surface
currently will be forgotten. A ‘wall of worry’ will have been climbed and so another slide down the
‘slope of hope’ will be about to begin.
All of this is getting somewhat into the realm of fantasy, clearly it is far from certain that a new
cyclical bull market has begun, but if it has it will be useful to keep some of these perspectives in the
back of one’s mind as the bull market runs its course, however far it goes and long it runs.
I have reproduced so much of that section that I wrote almost exactly four years ago because it
described the shift in attitudes, and importantly investor time frames, that occurs as a bull market
matures. The problems that were so obvious to everyone back in early 2009 have not been fixed; they
are still there and are very long term in nature. They are a secular problem. Within secular bear
markets the cyclical inflection points are not brought about by valuation or any fundamental drivers,
rather they are brought about by extremes of mood, or sentiment. At a cyclical trough, like that in
early 2009, or in early 2003, the very long term problems become all-encompassing, and dominate
virtually all investors’ outlooks. That is the bottom of the ‘slope of hope’ and so the start of the climb
up the ‘wall of worry’. At cyclical peaks the reverse is true, the long term problems are easily
overlooked amid rising prices and attitudes reflect an expectation of a continuation of the bull market
that by then has become accepted as ‘normal’. Investor appreciation of time frames concertinas in and
out with each bear then bull market. At troughs no one can think about long term opportunities the
problems are too obvious, at peaks no one worries about short term corrections, the long term
opportunity is all that matters.
Perhaps the most important sentence in the section that I wrote four years ago was the final one
regarding the value of aiming to keeping some perspective as the bull market runs its course.
Unfortunately the majority now appear to have lost that perspective and are only focussed on the long
term opportunity.
Then and now!
What follows is just a selection of the many one hundred and eighty degree reversals that have been
seen over the last four years, but what was also interesting in reviewing the bulls of today with their
attitudes of four years ago was that many of the current spokespeople weren’t in their current jobs
back then and some may not even have been in the investment business.
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Morgan Stanley now: Adam Parker, Morgan Stanley’s chief U.S. equity strategist, has adopted a
positive view of stocks for the first time since he started his job in 2010. (21st March 2013)
Morgan Stanley then: Investors should sell into the recent stock market rally, Morgan Stanley’s
strategist said Monday, arguing that it can’t last as corporate earnings deteriorate further.
“We simply do not believe that the market has completely priced in the prospect of further earnings
weakness or that it will, without interruption, look through this weakness to recovery,” Morgan
Stanley strategist Jason Todd wrote. (late March 2009 after the first 25% rise)
Michael Hartnett now: “Relative U.S. economic outperformance on the back of the housing market's
ongoing improvement and the energy independence story will lead a secular uptrend in the dollar,"
said Michael Hartnett, chief investment strategist at BofA Merrill Lynch, a unit of Bank of America
Corp. (BAC). Meanwhile U.S. equities' leadership in the shift "suggests developed market equities are
the likeliest winner in this scenario." (19th March 2013)
Michael Hartnett then: In the survey, America still comes up as a popular stock market, but not
because of bullish prospects. "It's really seen as a safe haven in troubled times," says Michael
Hartnett, co-head of international investing strategy at the Wall Street firm. That's not the kind of
optimistic perception that powers a sustained bull run. (March 19 2009)
Rich Bernstein now: We have thought for some time that the current bull market might be one of the
strongest of our careers, and could potentially rival the 1980s bull market (March 7th 2013)
Rich Bernstein then: Just Monday, he advised selling bank stocks after their recent rally, saying the
government’s latest plan to get rotting assets off banks’ balance sheets would just delay an inevitable
further industry consolidation. (LA Times March 24th 2009)
Nouriel Roubini now: ROUBINI: 'Short-Term Bullish, Long-Term Catastrophe'
Nouriel Roubini then: 'Dr Doom' predicts further shocks in the market (The Independent April 21st
2009)
Warren Buffett now: “Always be bullish on America” Warren Buffett (4th March 2013)
Warren Buffett then: “the economy will be in shambles, throughout 2009, and, for that matter,
probably well beyond.” ( NYT 1st March 2009)
The mood in early 2009 was certainly not optimistic and was a world apart from what so many seem
to see now. Businessweek summed up the mood very well in their edition on the 4th March 2009. The
headline read;
When Will the Bull Return?
The article began;
While 17 months may feel like an eternity, it could turn out merely to be a prequel. The questions on
the minds of investors, money managers, and corporate executives are threefold: How much longer
will the bear market last? How low will the averages go? And when might investors get their money
back? As Warren E. Buffett has said: "Beware of geeks bearing formulas." It's especially difficult to
predict the direction of the markets these days because the most popular gauges, from price-earnings
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ratios to measures of investor "capitulation," have stopped working. The peculiar nature of this bear
market limits the kit of useful tools to just a handful of bond market and business confidence
indicators. Those signals, along with interviews with financial historians, market strategists, and
economists, point mostly to painful scenarios. Stocks don't seem likely to fall much more from here—
but market turmoil could continue for months or even years. Worse, by the time the market revisits its
highs, so many years are likely to have passed that many older people will have gotten out of stocks,
missing out on the rebound. The flip side is that new money put into the stock market now will likely
do comparatively well over the long term. That's welcome news for twentysomethings and executive
compensation consultants, but perhaps not for soon-to-be retirees.
The consensus at the time was very bleak indeed and bullish voices were generally decried as not
understanding the true severity of the situation. When the rally continued to surge higher the doubters
continued to dominate the media headlines. In late April of 2009 I wrote the May 2009 edition of
Strategy Thoughts I included the following selection of headlines put together by Investec research;
Rally, Yes; Bottom, No
Forbes.com – 3/10/09
No Way You’re Getting Me Back in This Market
Yahoo! Finance – 4/8/09
Is this a sustainable bull market?
The March run likely will lead to weakness
MarketWatch – 4/1/09
Warning: The bear isn’t hibernating yet
CNNMoney.com – 4/1/09
Goldilocks rally meets the bears
March was good, but a downturn is inevitable
MarketWatch – 4/1/09
Don’t Buy the Chirpy Forecasts
The history of banking crises indicates
this one may be far from over.
Newsweek – 3/30/09
Bear Rallies Turn Market Into a Circus
Wall Street Journal – 3/23/09
Enjoy the Sucker’s Rally, Says Merrill’s Rosenburg
Yahoo! Finance – 3/19/09
Roubini Says Rally is a “Dead Cat Bounce”
The Business Insider – 3/16/09
Is This A Real Rally Or Dead Cat Bounce?
Investors Business Daily – 3/16/09
The Forbes story included a quote from Art Hogan;
“You’ll know the current hard times are over when the government tells you, by way of improved
economic data.The bad news would need to decrease in magnitude” said Art Hogan, chief market
analyst at Jefferies”. That same Art Hogan was quoted in a recent CNBC.com article: “We’re
certainly in an environment where good news is great and bad news is just okay. The market has just
found the path of least resistance to the upside in the near term and it’s hard to find something to
knock it off there.”
The CNN money article quoted John Lynch and Bill Stone with reasons why the market would soon
retest the March lows and that it was too soon to get back into the market;
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“Bill Stone, Chief Investment Strategist with PNC Wealth Management in Philadelphia, said it's
looking like the economy probably shrunk by at least 5% in the first quarter, following a more than
6% drop in the fourth quarter of 2008. He added that the job market is still in bad shape as well. So
with that in mind, Stone agreed with Lynch that it would not be a major surprise if stocks retreated
back toward this year's lows. "It's never safe to say we've hit bottom," he said.
Four years later the same Bill Stone was interviewed by The Wall Street Journal and explained why
the new high in the Dow was a reason for confidence (I think he may have got that around the wrong
way!)
The Marketwatch column subtitled ‘the March run will likely lead to weakness’ was written by
Drew Kanaly of Kanaly Trust. That same firm’s first quarter outlook for 2013 was far more
optimistic, including the key points, Major global event risks have faded, the majority of global equity
markets in a bullish trend, economic recession risk is low and raising the prospect of a new secular
bull market.
It is important that investors recognise just how dramatic an attitudinal shift has occurred over the last
four years. Something long term and secularly good is not starting now and it didn’t start in 2009
either.
Finally, just to illustrate how far things have come, I was amused by the headline in Barron’s
regarding the US budget impasse and the automatic cuts, or sequester, that kicked in;
The Sequester: More Opportunity Than Danger
At the start of a new bull market such a thing would be universally recognised as being bad for the
economy and so bad for the market. That is the kind of back drop that is found when a ‘wall of worry’
is being climbed. By the time the top of that wall is reached it is not that there is no longer anything to
worry about, rather the majority choose not to worry about it or even dresses it up as a positive. I was
also amused by the following headline on Bloomberg;
Short Sales Decline 53% as Bull Market Enters Fifth Year
Bloomberg 4th March
The article pointed out that short sales, or bets on stocks going down, had fallen dramatically now that
the bull market was over four years old. The irony of them being the lowest since 2007 seemed to be
lost on the author. Likening anything in the markets now to 2007 should not be seen in anyway as a
positive.
Active share revisited, again!
Some readers may remember comments I made over the last few months regarding ‘active share’. It is
a measure of how active fund managers actually are and is increasingly raising questions as to why an
investor should pay for active management when all they are getting is ‘closet indexing’. This
tendency towards indexing, that is attempting to ensure that one’s fund is not too different to the
index, is, it seems, deeply embedded in the fund management industry. It is better to be wrong with
everyone else than to do what you believe to be right and risk being wrong alone. This sentiment was
brilliantly captured in a recent ALEX cartoon sent to me by ever observant reader Neil Beattie.
The scene has Alex lunching with his client Jeremy:
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A: You’ve been bearish on stocks for the last year Jeremy, but now you are piling in
J: I still believe the fundamentals are all wrong Alex, but I manage money on behalf of my
investors…markets are booming and if my fund doesn’t own equities I miss out on making a profit.
At the end of the day I’ve got to remember where my obligations lie and whose money it is I’m
investing.
A: Someone else’s??
J: Quite…so what have I got to lose?
A: Well your job if you continued to do nothing…
J: Exactly. It focusses the mind wonderfully.
Active share will likely get more and more coverage if markets once again become challenging. It will
be important for all investors to know just which risks their fund managers worry the most about, their
clients or their own.
Irrational exuberance or not?
Alan Greenspan made his famous ‘irrational exuberance’ statement in December 1996 as the Dotcom
boom was getting into full swing. Now, with the benefit of hindsight we all know that the exuberance
had far further to run and that it had to become far more irrational before the bubble would burst,
unfortunately for Mr Greenspan he changed his mind as to whether the markets were irrational just
when we now know they were irrational. Like so many investors he got whipsawed. He later stated
that economists couldn’t detect a bubble until after it has burst, a sentiment that his successor seems to
share. Perhaps these ‘misses’ should alert investors as to the value or otherwise of Mr Greenspan’s
assessments of markets, but still the media appears to hang on every word of the former ‘Maestro’.
On the 15th of March this year Greenspan told
CNBC that irrational exuberance is the last term he
would use to describe today’s market. He went on
to say that stocks by historical standards are
‘significantly undervalued’.
These comments no doubt will have boosted the
confidence of the growing herd of stock market
bulls discussed earlier, however, history clearly
shows that investors should place very little
confidence on Mr Greenspan’s observations, no
matter how well intentioned they may be.
In the past I have frequently questioned the value
of employing economic views (not just Mr
Greenspan’s) as the basis for an investment view.
History repeatedly shows that it is of minimal
value, the markets forecast the economy far better
than the other way around and markets are
virtually uncorrelated to GDP. These comments
don’t sit comfortably with a lot of investors who intuitively feel that the economy should be reflected
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in the market. In prior editions of Strategy Thoughts I have explained at some length why I don’t
believe this to be the case so when I saw the chart above in the Economist magazine from the 9th
March I thought it was worth sharing.
The chart looked at all the bull markets in the US since the late forties, how much they rose and how
strong the economy was throughout the rise. The following comments accompanied the chart;
It is tempting to attribute the strength of the Dow to optimism about the American economy.
Tempting, but wrong. Studies have shown almost no correlation between GDP growth and equity
returns. Indeed, the Shanghai stockmarket trades at less than half its 2007 peak, even though the
Chinese economy has performed much more strongly than that of America since then. As the chart
shows, this rally in the Dow has been accompanied by the weakest GDP growth of all the bull markets
since the second world war the economist magazine
The important phrase is ‘Studies have shown almost no correlation between GDP growth and equity
returns’ but still the majority seek the comfort offered by an economic rationalisation. Unfortunately
these rationalisations will all be optimistic when markets are peaking and miserable when investment
opportunities are highest.
Look Out Australia (Pride comes before a fall!)
Back in late 2008 and in mid 2006 I wrote two articles under the title ‘Pride comes before a fall’. The
first was prompted by Dubai’s stock market weakness after the construction of the tallest building in
the world began and the second was after Kuwait announced they were aiming to build something
taller. The gist of both articles was that by the time any country, city or state becomes so confident
that they want to build the tallest building in the world then hubris may have replaced mere
confidence. History is littered with examples of the next tallest building in the world being planned
and announced at the crest of a boom only for that boom to have turned to bust by the time the
building is opened. Obviously it is not the case that such an announcement causes economies and
markets to retreat, rather it is the case that the desire to build such a tower is a symptom of the
excessive confidence that is found at an important peak. It was therefore with some alarm, but not
total surprise, that I received an email from long time reader Matt Hol after the announcement of the
approval to build Australia 108 in Melbourne. CNN ran the headline;
Going up Down Under: Southern Hemisphere's
tallest building
The 388-meter futuristic Australia 108 in Melbourne will become a record holder, for a short while at least
21 March, 2013
Naturally none of this means that the ‘lucky country’ is about to collapse, but it does indicate that
internally at least confidence is at a very high level. Investors would do well to remember that ‘pride
really does come before a fall’.
Conclusion
For many months now I have not changed my view, now is a time for caution amid the increasingly
optimistic media.. Preservation of capital will be most important through the next cyclical downturn
and the current environment is not unlike those seen at prior cyclical peaks. It was no surprise that the
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recent very brief sell off was seen as another opportunity to ‘buy the dips’. Don’t be surprised if a
more serious sell off occurs and it is dismissed as just a ‘healthy correction’, all bear markets in their
early stages are seen as this ‘oxymoron’.
This months Strategy Thoughts aimed to illustrated just how far attitudes have changed. Seeking the
comfort of a bullish concensus may provide the comfort of the herd and this may feel good for a
moment but it will become very uncomfortable when the ‘healthiness’ of any correction eventually
becomes less obvious.
Kevin Armstrong
26th March 2013
More thoughts on Apple
Bloomberg anchor, and an older user of an iPhone, Tom Keene, asked a simple question of a
technology expert recently;
"What I see is a generational divide, is that true? Older people use iPhones, younger people use
Samsungs."
I don’t know the answer, although I do probably fall into the ‘older’ category, and I do use an iPhone.
I have been commenting for many months now that the market has been telling us something about
Apple that the majority, until perhaps now, after a 40%+ fall, didn’t want to face up to.
Waiting for the reasons as to why any bear market has happened does nothing to protect an
investment. Most bear markets occur not because the underlying fundamentals deteriorate; rather they
happen because expectations were far too optimistic at the peak. A minor disappointment to highly
exaggerated expectations can trigger a meaningful bear market.
Final note
This morning chief investment strategist at Standard and Poor’s, Sam Stovall was on CNBC
forecasting 1680 for the S&P500 by the end of the year, a wonderful extrapolation of the bull market
to date. I just checked what Sam was saying four years ago. This from Businessweek in early March
2009;
An analysis by Sam Stovall of Standard & Poor's is discouraging for those who hope the
declines just can't reasonably get any worse—or last much longer—than this. The 15 bear
markets since 1929 have lasted an average of more than 18 months and lost investors a
median of 34%. However, for "mega-meltdowns"—where indexes fell more than 40%—the
average drop was 51% and the bear market lasted more than two years. Between 1929 and
1932, the S&P 500 fell 86%. The 1938 to 1942 bear market lasted 42 months. When this
bear market is finally over, nothing says it couldn't have experienced the worst of all
levels," Stovall wrote in a Mar. 2 note. (emphasis added)
Disclaimer
The information presented in Kevin Armstrong’s Strategy Thoughts is provided for informational purposes only and is not to be considered as an offer or a
solicitation to buy or sell particular securities. Information should not be interpreted as investment or personal investment advice or as an endorsement of
individual securities. Always consult a financial adviser before making any investment decisions. The research herein does not have regard to specific
investment objectives, financial situation and the particular needs of any specific individual who may read Kevin Armstrong’s Strategy Thoughts. The
information is believed to be-but not guaranteed-to be accurate. Past performance is never a guarantee of future performance. Kevin Armstrong’s Strategy
Thoughts nor its author accepts no responsibility for any losses or damages resulting from decisions made from or because of information within this
publication. Investing and trading securities is always risky so you should do your own research before buying or selling securities.
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